The State of Crypto in the United Kingdom — Future Crypto Hub or Failed Economy?
Crypto Basics

The State of Crypto in the United Kingdom — Future Crypto Hub or Failed Economy?

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1 year ago

In this report, CoinMarketCap Academy travels to the United Kingdom— which underwent a tumultuous political period, before new leadership is now set on making the UK a global crypto hub.

The State of Crypto in the United Kingdom — Future Crypto Hub or Failed Economy?

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The United Kingdom’s economy has not exactly been a shining example in the past year — high inflation rates and rising interest rates has resulted in a projected recession in 2023, with the economy expected to shrink 1.3%, according to KPMG. The back-to-back challenges placed UK under great strain and forced the government to enact more than a few controversial policies to get it back on track.

But despite a turbulent last quarter, the UK appears to be moving in the right direction. And with new leadership and a change in strategy, it could be on track to separate itself from other G20 countries.

In terms of crypto adoption, 6.2% of Brits own cryptocurrency, according to an estimate by TripleA. Meanwhile, Chainalysis’s 2022 Global Crypto Adoption Index places the United Kingdom at 17th, and is only one of two high income countries in the top 20 — the other being the United States.

The country is now set to embark on a major push to not only restore its economy but also reinvent itself as a global crypto hub — potentially multiplying its crypto tax revenue and importing a host of new talent to boot.

But will it work?

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The Collapse of the Pound Sterling

Source: marketwatch.com

The GBP has been on a negative trend against the USD, losing over 40% of its value since 2007 — after it hit a record high of 2.06 GBP/USD. This downtrend accelerated dramatically between June 2021 and September 2022 — during which the pound lost more than 26% of its value against the dollar in 15 months.

Owed to the bungled execution of Brexit, sustained political turmoil, hiking interest rates, energy crunch, and the poorly received (and now largely scrapped) “mini-budget”, the pound has seen its purchasing power and relative value tank.

Like most fiat currencies, the British pound sterling (GBP) has been crushed by the US dollar (USD) in recent months. Indeed, the USD has gained 12.98% against the GBP over the last year, which places it among the top four of G10 currencies against the USD. For comparison, the USD gained just 2.15% and 4.51% against the Swiss franc (CHF) and Canadian dollar (CAD) respectively in this time.

The recent collapse of the sterling also led to a spike in GBP to BTC trading volume, sending it to a 1-year high in September 2022. As per data published by Kaiko, BTC/GBP trading volume spiked as traders looked to profit from the volatility of the GBP or escape inflation.

England Welcomes New Prime Minister

On October 20, 2022, former British prime minister Liz Truss resigned from her post after just six weeks in office — becoming the shortest-serving prime minister in UK history by a wide margin.

This came following weeks of controversy and political turmoil surrounding her now failed mini budget.

Just days later, Rishi Sunak was welcomed into office as the fifth PM in the last six years (and the third this year). This was largely seen as a boon for the UK economy, given Sunak's independent success as a businessman and long storied history as a member of parliament.

Immediately following his appointment as UK’s new PM, the pound sterling began to reclaim some of the losses it incurred while Liz Truss held the post. With a new plan to rescue households, bolster the economy, guarantee wages, combat inflation, and inject new capital into the economy, Sunak is now charged with ensuring its revival.

As a vocal advocate of blockchain and crypto, Rishi Sunak is seen as a crypto-friendly PM. During his post as Chancellor of the Exchequer, Sunak said:

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“It’s my ambition to make the UK a global hub for cryptoasset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country.”

Sunak is now likely to introduce a financial market infrastructure sandbox, which will allow firms to explore the use of blockchain technology and push innovation in the sector.

Last year, Sunak also proposed a UK central bank digital currency (CBDC) known as Britcoin. 2025 was set as the putative launch date for the CBDC, but as of yet, the UK central bank has not made the decision to introduce a digital currency.

Learn more about CBDCs and their potential role in society here.

Tax Changes and Turbulence

In September 2022, the UK's Chancellor of the Exchequer, Kwasi Kwartend delivered the not-so-mini "mini-budget" — which was designed to tackle the cost of living crisis and boost the economy by cutting taxes, scrapping several planned levies and tax hikes, freezing energy bills, and introducing several new investment zones around the UK.

Just weeks later, almost all of the tax cuts put forward in the mini-budget were scrapped following a dramatic government U-turn. This caused significant political unrest, while news emerged that the government may reduce the income tax thresholds — helping it raise more money to restore the economy.

The UK now has the third highest inflation rate in Europe at a 40-year high of 10.1% as of September 2022 — just behind Belgium's 11.27% and the Netherlands' 14.5%. To put this into perspective, the average for the euro area (Eurozone) sits at 9.9%.

The UK’s Crypto Future

Right now, the UK does not exactly stand out as a crypto haven. Crypto gains are taxed at the 20% capital gains tax rate and businesses do not benefit from a particularly favorable crypto regulatory framework — since this is largely aligned with the EU’s fifth and sixth anti-money laundering (AML) directives.

But with a new PM now in office, the UK might soon get the boost it needs to separate itself as a global crypto hub.

Is your country considered one of the most crypto friendly? Find out here.

According to a comprehensive roadmap laid out back in April, the UK has a multi-step plan to help position itself as a global crypto hub.

Some of the measures set out in the plan include:

1. Creating regulations that make stablecoins a recognized form of payment.

2. Introducing a Cryptoasset Engagement Group to work closely with the industry and tackle issues facing the cryptoasset sector.

3. Potentially improving the competitiveness of the UK tax system to help foster growth.

4. Working with the Royal Mint to produce an NFT for Digital Britain (currently in development).

Further, in October this year, lawmakers have voted in favor of adding cryptocurrencies — termed “Digital Settlement Assets” — into the proposed Financial Services and Markets Bill, which would seek to regulate crypto as any other form of financial instruments. This includes stablecoins, which are believed to have the “potential to develop into a widespread means of payment.”

Should the government execute these measures quickly, it could find itself a hotbed for crypto innovation — competing directly with crypto-friendly countries like Georgia, Malta, Singapore, Portugal, and the UAE (Dubai).

But it will need a substantial overhaul of its crypto taxation rules to stand a chance of becoming a real crypto hub, given that many countries tax crypto profits at 5% or less. Finally, it remains to be seen whether the government will pass these policy changes into law — especially given arguably more demanding issues like the cost of living crisis. However, with the seemingly consecutive implosions in crypto this year and potentially fraudulent activities from the likes of FTX , the UK is seemingly more certain about the need for greater clarity and scope of regulation, which they believe will allow innovation to thrive while protecting consumers and businesses.

Echoing this, Minister Andrew Griffith mentioned that “there are questions about the future of crypto — but we’d be foolish to ignore the potential of the underlying technology.” The UK is certainly not ignoring the cryptocurrency industry — the government is “consulting on a world-leading regime for the rest of the cryptoasset market later this year” — but only time will tell if and when the policies implemented will be effective.

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